How Old Do You Have to Be to Get an Annuity?
Understand the crucial age factors influencing annuity contracts, from purchase eligibility to payout timing and withdrawal penalties.
An annuity is a financial contract established between an individual and an insurance company. Its primary purpose is to provide a steady income stream, often designed to support financial needs during retirement. Through this contract, an individual typically makes a lump-sum payment or a series of payments to the insurer, who then promises to provide regular disbursements back to the individual, either immediately or at a future date.
Minimum Age Requirements for Annuities
While there is no universally mandated federal minimum age to acquire an annuity, insurance companies typically set their own age requirements. Most providers require an individual to have reached the age of legal majority to enter into such a contract, which is generally 18 years old in the United States. In some instances, the age of majority for contractual agreements can be 19 or even 21, depending on the specific state’s laws.
Some insurance companies may impose higher minimum ages for certain annuity products, such as 40 or 50, due to their long-term, retirement-focused nature. There is typically no federal upper age limit, though individual companies may set maximum ages, often between 75 and 95.
Annuities can be established for minors, usually under specific circumstances. For example, they often fund structured settlements from legal judgments or inheritances for children. In these cases, a court or legal guardian controls the funds, and payouts are managed according to court orders until the minor reaches a predetermined age or the age of majority.
Age-Related Considerations for Annuity Payouts
The age at which annuity payouts begin significantly influences the financial benefits received. Annuities are categorized as immediate or deferred. Immediate annuities provide income payments within a year of purchase. Deferred annuities allow funds to grow, with payouts starting at a later, chosen date.
The annuitant’s age plays a significant role in determining payment size when converting the annuity’s value into periodic payments. Insurance companies use actuarial tables, which factor in life expectancy, to calculate payout amounts. Delaying annuitization to an older age typically results in larger individual payments, as the payout period is statistically shorter.
Annuities within tax-qualified retirement plans, such as IRAs or 401(k)s, are subject to Required Minimum Distribution (RMD) rules. These rules mandate withdrawals by a certain age to ensure tax-deferred savings are eventually taxed. RMDs typically commence at age 73, though the specific age can vary based on the annuitant’s birth year. Failure to take required distributions can result in a 25% excise tax penalty.
Early Withdrawal Rules and Penalties
Early access to annuity funds can trigger significant financial consequences, primarily tax penalties and contractual charges. The IRS imposes a 10% additional tax on distributions from non-qualified annuity contracts and qualified retirement plans before the annuitant reaches age 59½. This penalty encourages using these accounts for long-term retirement savings.
This 10% IRS penalty is distinct from “surrender charges” levied by the insurance company. Surrender charges are fees applied if funds are withdrawn or the contract is canceled during a specified “surrender period,” typically three to 10 years after purchase. These charges are often highest initially and gradually decrease. Many annuity contracts allow a penalty-free withdrawal of up to 10% of the account value each year.
Exceptions to the 10% Early Withdrawal Penalty
Several exceptions exist to the IRS’s 10% early withdrawal penalty, allowing penalty-free access to funds before age 59½:
- Distributions due to the annuitant’s total and permanent disability.
- Distributions made to a beneficiary after the annuitant’s death.
- Distributions taken as part of a series of substantially equal periodic payments, which must continue for at least five years or until the annuitant reaches age 59½, whichever is longer.
- Certain emergency personal expense distributions or distributions related to domestic abuse victims.